"Dragons Den" type funding
Discussion
Could someone explain something relating to "Dragons' Den" type investments?
If Mr X had an excellent idea, had the money to fund the tooling etc. but then couldnt afford to live, assuming he could convince the investor that it was a good idea, do you think it is reasonable for MrX. to ask the investor to include 12 month's salry in their investment? For example if he wanted £75k but £35k of that was a salary for himself??
If Mr X had an excellent idea, had the money to fund the tooling etc. but then couldnt afford to live, assuming he could convince the investor that it was a good idea, do you think it is reasonable for MrX. to ask the investor to include 12 month's salry in their investment? For example if he wanted £75k but £35k of that was a salary for himself??
Not necessarily. most investors - business angles (banks included) know that the wellbeing of the inventors/people in the business is paramount, and without them would fail taking their investment with them.
Whilst huge sums are frowned on a decent wage would not be. An investor would not like backing someone who was always worried about the finances at home and not concentrating on making his investment grow. 35K to support say a mortgae, wife and 2 children would not be unreasonable.
Obviously if you want to reap all the rewards and have no external investment, you may need every penny in the business, and bread and water would be the norm.
davidy
Whilst huge sums are frowned on a decent wage would not be. An investor would not like backing someone who was always worried about the finances at home and not concentrating on making his investment grow. 35K to support say a mortgae, wife and 2 children would not be unreasonable.
Obviously if you want to reap all the rewards and have no external investment, you may need every penny in the business, and bread and water would be the norm.
davidy
A Dragon doesn't really care too much about that.
What they're mostly looking at is how much they are investing and what the likely return is. If they invest 40k for 20% then surely if asked for 75k the percentage would rise, probably not linearly either. As long as you are open about what the funding is for and the likelihood of the Dragon either seeing a return after year 1 or at least the company being cash positive, i.e. it would have to make more than 35k profit in year 1, so that Mr X could draw down a salary in year 2... If you can forecast more than this, with a healthy margin for error then it should be fine, if not then I guess they wouldn't say yes to it.
What they're mostly looking at is how much they are investing and what the likely return is. If they invest 40k for 20% then surely if asked for 75k the percentage would rise, probably not linearly either. As long as you are open about what the funding is for and the likelihood of the Dragon either seeing a return after year 1 or at least the company being cash positive, i.e. it would have to make more than 35k profit in year 1, so that Mr X could draw down a salary in year 2... If you can forecast more than this, with a healthy margin for error then it should be fine, if not then I guess they wouldn't say yes to it.
The majority of the Dragons have been there and survived on bread and water, working every hour god sends - if you can't budget for yourself, how can you possibly manage a company, cashflow, book-keeping etc?
I was recently interested in a young start-up until the guy asked for £400/day to sit on his fat arse in order to 'test the market' - he went ahead without me, and he's up to his neck in trouble. Sure, there are situations where an investor may decide to cover basic 'living expenses' but so many would-be entrepreneurs either expect to take their initial profit as dividend and/or take a £100k salary when they've spent the last five years living off benefits.
I was recently interested in a young start-up until the guy asked for £400/day to sit on his fat arse in order to 'test the market' - he went ahead without me, and he's up to his neck in trouble. Sure, there are situations where an investor may decide to cover basic 'living expenses' but so many would-be entrepreneurs either expect to take their initial profit as dividend and/or take a £100k salary when they've spent the last five years living off benefits.
This is all hypothetical but you wouldnt need to "front invest" a wage.
For example my little business supports me but suffers cash flow every 2/3 months. The turnover is fine but there maybe a 1 month period where cashflow suffers and not wanting an overdraft means we make do in a feast - famine type way.
If I was to look for investment it would be to grow the business and smooth the cash flow issues but not to eat in to actual capital or guarentee me a wage.
For a "new" idea business then a few factors would need to be considered, personally I wouldnt see many investors guarenteeing an annual salary as part of the investment.
If you need money to start the business you do that first then you look at how soon that will start generating income. When it does you would take what you can whilst not impacting the business and the investor would look to help with business costs.
Basically I would expect an investor to be there when I needed a new phone system, product pacakaging etc not to cover my wages.
For example my little business supports me but suffers cash flow every 2/3 months. The turnover is fine but there maybe a 1 month period where cashflow suffers and not wanting an overdraft means we make do in a feast - famine type way.
If I was to look for investment it would be to grow the business and smooth the cash flow issues but not to eat in to actual capital or guarentee me a wage.
For a "new" idea business then a few factors would need to be considered, personally I wouldnt see many investors guarenteeing an annual salary as part of the investment.
If you need money to start the business you do that first then you look at how soon that will start generating income. When it does you would take what you can whilst not impacting the business and the investor would look to help with business costs.
Basically I would expect an investor to be there when I needed a new phone system, product pacakaging etc not to cover my wages.
To some extent it depends on the nature of the business anyway. Last company I was at was funded by two angels to the tune of a couple of million a year each. Salaries, including that of the MD where paid for out of those funds as the company was looking to break even within about 4 years. That is totally normal on those kind of relationships.
I was also involved in a company that was on DD and part of the money they went for would have included a salary for the only full time employee and that was considered reasonable. When the company sought a much higher level of investment the salary of the owner was part of the investment required as was salary for two other directors. All involved would have taken a fair pay cut to work on the company and all had been working for free up to that point in addition to their usual commercial activities but two of the three directors simply could not afford to leave their normal roles and work completely free for the 18 - 24 months it would have taken to even get the company and its product into the market place. As long as the salaries where reasonable (covered the mortgage, food but not holidays and flash cars!) even at that early stage it was considered fine.
I have been involved in a number of start-ups, some funded by the directors with perhaps small additional external amounts to ones funded to the tune of many, may millions by private investors or VC's and generally speaking, salaries are covered from the investment funds assuming the salaries have been fair and that the directors claiming them have shown that they have contributed significantly to the company based on their ability to do so. For example, one company I was involved with was started by 2 guys with not a penny between them, they had to borrow the cash for the PC's they needed to start the business (software development company so they needed some decent kit), one lived at home as it was his first year out of uni and the other had just left the forces and was broke. After 6 months of borrowing from friends and family an investor came in, paid back their loans and put them both on low salaries, enough to keep them going but not enough to live in luxury obviously.
These things tend, in my experience to be judged individually and there are no hard and fast rules but directors / owners salaries are often taken into account.
I was also involved in a company that was on DD and part of the money they went for would have included a salary for the only full time employee and that was considered reasonable. When the company sought a much higher level of investment the salary of the owner was part of the investment required as was salary for two other directors. All involved would have taken a fair pay cut to work on the company and all had been working for free up to that point in addition to their usual commercial activities but two of the three directors simply could not afford to leave their normal roles and work completely free for the 18 - 24 months it would have taken to even get the company and its product into the market place. As long as the salaries where reasonable (covered the mortgage, food but not holidays and flash cars!) even at that early stage it was considered fine.
I have been involved in a number of start-ups, some funded by the directors with perhaps small additional external amounts to ones funded to the tune of many, may millions by private investors or VC's and generally speaking, salaries are covered from the investment funds assuming the salaries have been fair and that the directors claiming them have shown that they have contributed significantly to the company based on their ability to do so. For example, one company I was involved with was started by 2 guys with not a penny between them, they had to borrow the cash for the PC's they needed to start the business (software development company so they needed some decent kit), one lived at home as it was his first year out of uni and the other had just left the forces and was broke. After 6 months of borrowing from friends and family an investor came in, paid back their loans and put them both on low salaries, enough to keep them going but not enough to live in luxury obviously.
These things tend, in my experience to be judged individually and there are no hard and fast rules but directors / owners salaries are often taken into account.
Pappa Lurve said:
To some extent it depends on the nature of the business anyway. Last company I was at was funded by two angels to the tune of a couple of million a year each. Salaries, including that of the MD where paid for out of those funds as the company was looking to break even within about 4 years. That is totally normal on those kind of relationships.
I was also involved in a company that was on DD and part of the money they went for would have included a salary for the only full time employee and that was considered reasonable. When the company sought a much higher level of investment the salary of the owner was part of the investment required as was salary for two other directors. All involved would have taken a fair pay cut to work on the company and all had been working for free up to that point in addition to their usual commercial activities but two of the three directors simply could not afford to leave their normal roles and work completely free for the 18 - 24 months it would have taken to even get the company and its product into the market place. As long as the salaries where reasonable (covered the mortgage, food but not holidays and flash cars!) even at that early stage it was considered fine.
I have been involved in a number of start-ups, some funded by the directors with perhaps small additional external amounts to ones funded to the tune of many, may millions by private investors or VC's and generally speaking, salaries are covered from the investment funds assuming the salaries have been fair and that the directors claiming them have shown that they have contributed significantly to the company based on their ability to do so. For example, one company I was involved with was started by 2 guys with not a penny between them, they had to borrow the cash for the PC's they needed to start the business (software development company so they needed some decent kit), one lived at home as it was his first year out of uni and the other had just left the forces and was broke. After 6 months of borrowing from friends and family an investor came in, paid back their loans and put them both on low salaries, enough to keep them going but not enough to live in luxury obviously.
These things tend, in my experience to be judged individually and there are no hard and fast rules but directors / owners salaries are often taken into account.
That was very informative! - Thank you.I was also involved in a company that was on DD and part of the money they went for would have included a salary for the only full time employee and that was considered reasonable. When the company sought a much higher level of investment the salary of the owner was part of the investment required as was salary for two other directors. All involved would have taken a fair pay cut to work on the company and all had been working for free up to that point in addition to their usual commercial activities but two of the three directors simply could not afford to leave their normal roles and work completely free for the 18 - 24 months it would have taken to even get the company and its product into the market place. As long as the salaries where reasonable (covered the mortgage, food but not holidays and flash cars!) even at that early stage it was considered fine.
I have been involved in a number of start-ups, some funded by the directors with perhaps small additional external amounts to ones funded to the tune of many, may millions by private investors or VC's and generally speaking, salaries are covered from the investment funds assuming the salaries have been fair and that the directors claiming them have shown that they have contributed significantly to the company based on their ability to do so. For example, one company I was involved with was started by 2 guys with not a penny between them, they had to borrow the cash for the PC's they needed to start the business (software development company so they needed some decent kit), one lived at home as it was his first year out of uni and the other had just left the forces and was broke. After 6 months of borrowing from friends and family an investor came in, paid back their loans and put them both on low salaries, enough to keep them going but not enough to live in luxury obviously.
These things tend, in my experience to be judged individually and there are no hard and fast rules but directors / owners salaries are often taken into account.
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